Compensation: Service fees an unresolved issue. Who pays?

W.H. Stuart & Associates was the first firm to charge clients for access to client-held accounts, announcing the fees in April 2000. It charges $12.50 a year for each account. On May 1, Manulife Financial Corp. brought in its annual trustee fee structure. It charges $75 a year for any nominee-name account of more than $50,000. Assante Capital Management Ltd.‘s fee is on a sliding grid, with a maximum of $125 a year.

The actual amounts may not be much, but for an advisor it may mean the difference between his or her clients staying with the firm or shopping around.

Greg Gray, vice president and chief operating officer of Manulife Financial, says increased costs of being a Mutual Fund Dealers Association member are making it necessary for firms to charge clients. Under MFDA guidelines, a dealer member could eventually pay anywhere from a few thousand dollars to more than $1 million in fees, depending on the amount of assets the firm manages. Larger dealers hope clients and reps can offset that cost, as well as help pay for updating the firm’s technology.

“We’re not doing anything uncompetitive,” says Gray. “The costs are market-based, while the MFDA costs are just a flow-through.”

In addition to the annual trustee fees, Manulife’s lowest-producing reps will pay a desk fee totalling $1,200 a year, while others will pay anywhere from $300 to $1,500, depending on their assets under administration. These fees are also meant to cover Manulife’s cost of being an MFDA member.

At the same time, there is a push to move as many clients as possible into a nominee-name environment. With a nominee set-up, the client’s account is held under the firm’s name, unlike a client-name account, which is set up directly with the fund company in the client’s name. But if the account fees are higher on nominee-name accounts, some advisors wonder if the firms are punishing clients for choosing certain products.

“Why would I pay $45 to buy ice cream at Baskin Robbins when I can get it cheaper down the street at Dairy Queen?” asks Colin Gladwish, national compliance manager at IPC Financial Network Inc. in Toronto. Generally, fees for self-directed accounts, available at virtually all the firms on the Street, are less than annual trustee fees.

“There are tremendous pros to working in nominee-name accounts,” says Debbie Romhild, director of corporate services at Assante in Winnipeg. “For one, they can take trading instructions over the phone.”

In a client-name account, a signature has to be produced before an advisor can take any action on a client’s investment. Circumventing the signature requirement further shortens the settlement cycle, allowing the client to be paid directly from the dealer within three days of the transaction. With client-name accounts the settlement comes from the fund company and then the dealer, which takes longer and leaves room for errors.

The question is: how do you convince clients they should pay for this service? The answer: you don’t.

“They don’t care who pays, whether the client pays or I pay,” says one Manulife rep in Alberta, adding he’ll pay the fee himself at expense to his own payout.

An advisor with W.H. Stuart in Alberta agrees. “I don’t like to put extra account fees on my clients. I take these on as my fee,” she says.

Having the advisor cover the fee is a simple solution when the client invests a good portion of his or her assets with the rep. But, for clients with only a couple of thousand dollars in assets, are advisors willing to give up a portion of their commissions to cover the cost?
The answer is “no.”

“They have instituted account fees and that will segment my clients,” says an Ontario W.H. Stuart rep. He believes the account fees will force him to seek larger clients who will validate these new costs of doing business. At Manulife, however, the $75 fee is only applicable at more than $50,000 in assets. “I understand that fees and such are increasing,” says the W.H. Stuart rep, but in terms of who’s paying the MFDA fees, “they get a free ride.”

In essence, once the advisor pays his or her portion of the MFDA fee to Manulife, then covers the annual trustee fee, he or she has paid twice.

But there’s another way reps will be paying. Under MFDA guidelines, clients must sign a limited authorization agreement with their advisor.

The agreement gives advisors the licence to act on their behalf. But if the advisor decides to change firms, the licence expires and a new agreement will have to be signed with the new firm. At Manulife, an account transfer costs $150 a client. Some advisors complain that this makes moving firms next to impossible. “I’ve been told that my book is my book, but now, I don’t know,” says one Manulife rep in Alberta.

She says the death of the bulk transfer could be the death of moving firms. She may be right. Moving her book would not only require 400 signatures but would also cost her $150 to move each client who has a nominee-name account.

“I think more and more advisors are going to build their businesses on insurance products just to get out from under the new MFDA guidelines,” says one Manulife rep in British Columbia.
Otherwise, there doesn’t seem to be much an advisor can do. Manulife says the fees are being instituted across the board at any firm dealing with nominee-name accounts. “Quite frankly, we’re going through a paradigm shift in this industry,” says Gray.

Meanwhile, several former W.H. Stuart reps took their disputes over annual account fees to small claims court last year. Their claim was that Stuart had unfairly dropped the account fees on them with insufficient notice. Of the one case that actually made it to trial, the court ruled in favour of the dealership. The other reps settled with the firm. IE